PRIIPs regulation: latest updates

Article

PRIIPs regulation - Latest updates

Current Status

What are the latest regulatory developments regarding PRIIPs?

Since January 1, 2018, intermediaries distributing investment products to retail investors are required by the PRIIPs regulation (EU) n° 1286/2014 to provide them with a key information document, or "KID". All the funds currently using a UCITS KIID benefit from an exemption until December 31, 2019 and do not need to produce a PRIIPs KID.

Over the last months, the representatives of the fund industry (EFAMA, AFG, BVI, Assogestioni) have increased their lobby strongly supporting a delay in the application of PRIIPs to UCITS funds to the 2022 horizon. Insurance Europe, representing the insurance industry, has on the contrary supported the opposite position. From its point of view, PRIIPs allows a transparent comparison between all types of investment products (funds, insurance products and others) and must be applied without delay to the UCITS funds.

The ESMA expressed its concern and called on the European Commission to take action without delay to resolve this situation.

Finally, at the beginning of December, the Committee on Economic and Monetary Affairs of the European Parliament (ECON committee) voted to postpone the PRIIPs application to UCITS. This means that the UCITS exemption has been extended of another 2 years and will apply from 2022. The Commission is has been given one more year to finalize their Level 1 review (by 31 December 2019). At the same time, the ECON committee is addressing a letter to the Commission to ask for the commencement of the review as soon as possible.

However, it is worth mentioning that on the assumption nothing is changed in the regulation, as of January 1, 2022, a retail investor investing in a UCITS product will be given two different documents: a KIID UCITS as well as a KID PRIIPs.

The regulation

What are the main changes between the UCITS KIID and the PRIIPs KID?

Even though sharing the same purpose, both documents are based on different methodologies when it comes to computing the performance scenarios and ongoing costs. The main differences concerns the following features:

UCITS KIID content PRIIPs KID content
Past performance scenarios Future performance scenarios extrapolated from past performance. Given the bullish market we experience over the last years, many investment funds show extremely optimistic results, with positive performance even in so-called "unfavorable" scenarios
Cost and charges do not include Transaction costs Transactions as composed of an explicit and implicit parts. The methodology for calculating the implicit part, as advocated by PRIIPs as the “arrival price methodology”, includes market effects. It often results in negative costs, which may seem counterintuitive to an uninformed investor of this methodology
UCITS Narratives PRIIPs Narratives: Additional narratives compared to the UCITS KIID must be provided in the PRIIPs. These relates to:
  o Investment objectives section – (if different from UCITS)
  o "How can I complain" information 
  o Other practical information (if different from UCITS)
  o "What happens if the fund is unable to pay out?" information
  o "How long should I hold it and can I take the money out early" information

 

The ESAs issued on 8 November a consultation paper to seek stakeholders’ view on proposed amendments to the PRIIPs RTS regarding the inclusion of information on past performance, additional narratives and a clarification on the summary risk indicator for auto callable products.

The ESAs will consider the feedback received during this consultation by 6 December 2018 and intend to submit the RTS to the European Commission for endorsement during January 2019. The ESAs will also publish a final report including feedback on the consultation at the same time.

We monitor regulatory developments and will adapt our PRIIPs KID Factory services to the latest PRIIPs regulatory framework if necessary.

What about the UCITS KIID grandfathering exemption?

As mentioned earlier, UCITS KIID have been granted an extended exemption period until 2022.

Can an AIFM produce a UCITS KIID for any AIF launched after 1/1/2018?

The initial PRIIPs regulation (EU) n° 1286/2014 foresees that any AIF making use of a UCITS KIIDs as at 1/1/2018 would benefit from the exemption period granted to UCITS funds. The question was still pending for any AIF setup after 1/1/2018. What are their obligations? The Luxembourg Law of April 17, 2018 transposing the PRIIPs regulation states in article 2 that a UCITS KIID can be provided for a fund that is not a UCITS KIID as per part V, chapter 21, section C, of the Luxembourg Law of December 17, 2010. The KIID should mention that the fund is not a UCITS fund as per the UCITS directive 2009/65/EC. These funds benefit from the exemption period until the December 31, 2021. This interpretation is applicable to Luxembourg domiciled funds. We recommend you to take an external legal advice for any European funds domiciled in any other member states.

In practice

What are the obligation with regards to the annual update for PRIIPs KID?

Since the PRIIPs Regulation and related RTS do not impose any specific frequency of review, Deloitte recommends

  •  A regular / periodic review of the document
  • A revision of the KID at least once per year

The key principle is that a review must take place on a regular/periodic basis as deemed appropriate and that a prompt revised version must be published when any change has been identified (“without” delay after the review is performed).

In case no update has been performed on the document during the year, we would recommend the KID to be updated at the same time as the annual update planned for the UCITS KIIDs.

Next steps

Annual update – UCITS KIIDs

For the UCITS KIIDs annual update coming soon, we will first make sure your KIIDs are updated for the 2019 deadline on February 19th. To this end, we have provided our KID factory client with a slide deck detailing the main milestones and deadlines for the annual update together with the data needed.

From the PRIIPs side, there is also a requirement for an annual update, however, the timing is not strictly defined as 35 business days following the end of the year. As a matter of efficiency, we recommend that all the AIF producing a PRIIPs KID to update it for the same date, i.e. February 19, 2019.

Switch from UCITS to PRIIPs

Given the extension of the exemption period until December 31, 2021, we recommend to wait for the review by the European commission of the level 1 guidelines before taking any action. We will follow-up on the evolutions of the associated regulations and keep you informed in due course.

We trust this information is of assistance. We remain at your disposal for any further questions you may have on the PRIIPs regulation as well as on the KI(I)Ds services we can offer to asset managers and insurance companies.

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